What is Self-Employment Tax?
Self-employment tax is the combined Social Security and Medicare tax that self-employed individuals must pay. Unlike W-2 employees who split this tax with their employer (each paying 7.65%), self-employed workers pay both portions (15.3% total). This tax applies to 92.35% of your net self-employment income.
The SE tax consists of 12.4% for Social Security (on earnings up to $168,600 for 2024) and 2.9% for Medicare (no earnings cap). Additional Medicare tax of 0.9% applies to income over $200,000 for single filers or $250,000 for married couples. You can deduct one-half of your SE tax from your income tax calculation.
Examples
Example 1 - Freelancer: Income: $50,000, Deductions: $5,000. Net: $45,000. SE Taxable: $41,573. SE Tax: ~$6,361. Deductible: ~$3,181.
Example 2 - Side Gig: Income: $20,000, Wages: $80,000, Deductions: $2,000. Net: $18,000. Already maxed SS from wages. Medicare only on SE. SE Tax: ~$522.
Example 3 - Consultant: Income: $100,000, Deductions: $15,000. Net: $85,000. SE Taxable: $78,498. SS portion: $21,848 (maxed). Medicare: $2,277. SE Tax: ~$9,902.
FAQ
What income is subject to SE tax?
Net self-employment income from Schedule C or partnership K-1s. After deducting business expenses, multiply by 92.35% to get SE taxable amount. Income below $400 is exempt. W-2 wages are not subject to SE tax (already had FICA withheld). Investment income, rental income, and some passive activities are generally not subject.
How does SE tax differ from income tax?
SE tax is a flat 15.3% on 92.35% of net self-employment income (12.4% Social Security + 2.9% Medicare). Income tax is progressive (10-37%) on all taxable income including wages, investments, and business profit. You pay both taxes on self-employment income. SE tax funds Social Security and Medicare; income tax funds general government operations.
Can I reduce my SE tax?
Strategies to reduce SE tax: Maximize business deductions to lower net income; Form an S-Corp and take distributions (only salary subject to SE tax, not distributions); Stay under Social Security wage base with employment income; Structure as partnership if multiple owners. Note: You cannot deduct retirement contributions from SE tax calculation - they're deducted after SE tax is calculated.
What forms do I file for SE tax?
Schedule C (Form 1040) reports business income and expenses. Schedule SE calculates self-employment tax. Form 1040-ES for quarterly estimated payments. Form 1040 includes SE tax on line 23. If S-Corp: Form 1120-S and K-1 (no SE tax, but W-2 wages subject to payroll tax). These forms are filed with your annual tax return.
Do I pay SE tax on rental income?
Generally no. Rental income is passive and not subject to SE tax. However, if you provide substantial services (hotel-like operations, Airbnb with extensive services), the IRS may consider it a business subject to SE tax. Real estate professionals who materially participate may have different treatment. Consult a tax professional for complex situations.
How do quarterly estimated payments work?
Self-employed individuals must pay estimated taxes quarterly since no employer withholds. Calculate: Expected income tax + SE tax - credits and withholding. Divide by 4 for payment amounts. Due dates: April 15, June 15, September 15, January 15. Underpayment penalties apply if you owe $1,000+ and paid less than 90% of current year or 100% of prior year tax.
What if I have both W-2 and 1099 income?
You pay SE tax only on 1099 income. W-2 wages have FICA already withheld by employer. However, Social Security wage base ($168,600 for 2024) applies to combined W-2 and SE income. If W-2 wages exceed the cap, you only pay Medicare portion (2.9%) on self-employment income, not Social Security. Your W-2 employer still pays their half regardless.